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Class action challenges LPS’ grip on foreclosures

 By PAUL THARP, Staff Writer

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Ever heard of LPS?

Many attorneys haven’t. But LPS – Lender Processing Services, Inc. – and like business entities exercise more day-to-day control over the conduct of bankruptcy, default and foreclosure cases in North Carolina and beyond than actual “clients.”

At least that is what several recent lawsuits allege.

The cases arose in the context of a Chapter 13 bankruptcy proceeding in the U.S. Bankruptcy Court for the Northern District of Mississippi.

A second case arose as a counterclaim in a foreclosure proceeding in Kentucky. A third suit brought against J.P. Morgan Chase, LPS and other defendants is pending in Georgia.

Attorney Robert G. Rikard of Columbia, S.C. is among the attorneys representing debtors in the Mississippi case.

In that case, Jonathan R. Thorne and Darlene S. Thorne brought suit individually “and on behalf of all other persons similarly situated” against Prommis Solutions Holding Corp., LPS and its subsidiary LPS Default Solutions, LLC, a Boston-based venture capital company named Great Hill Partners, LLC and an Atlanta-based law firm named Johnson & Freedman, LLC.

“Essentially the allegations against LPS and other defendants are that they have engaged in unethical and illegal fee-splitting and the unauthorized practice of law in every state in the United States,” said Rikard.

Locke Bailey, the Chapter 13 trustee for the Northern District of Mississippi, joined the case as a plaintiff along with all Chapter 13 trustees in the United States.

LPS CEO Jeff Carbiener acknowledged in an Oct. 29 conference call with investors that LPS had been significantly impacted by events “well-publicized in the media over last few months,” but he rejected the allegation that the company participates “in fee-splitting or revenue sharing with attorneys.”

Both Great Hill and Prommis did not return calls for comment. Representatives at Johnson & Freedman could not be reached by press time.

Illegal fee-splitting

The principal allegation in the Thorne suit is that LPS serves as an intermediary between loan servicers and law firms that provide legal services for holders of notes and mortgages.

“LPS is a non-lawyer entity that charges an illegal referral fee for sending foreclosure work to law firms,” Rikard said.

In Thorne, the debtors allege that Johnson & Freedman is a part of a network of firms “who have executed contracts…which provide that the law firms will split legal fees with LPS for matters referred to the law firms by LPS.” The firms agree “to never voluntarily disclose to any court the existence of the contract” or the referral fees.

Shelby-based bankruptcy and foreclosure defense attorney O. Max Gardner III said LPS and other providers are “very concerned about network lawyers discussing anything with outside entities.”

Failure to disclose the fees violates Rule 2016(a) of the Bankruptcy Code and constitutes a fraud upon the bankruptcy court, according to the Thorne complaint.

The fees increase the indebtedness of the debtors and class members and “thwart the efficient administration of the bankruptcy scheme.”

Carbiener said LPS bills attorneys monthly based on their use of technology and administrative services. The billing is “similar to any other operational cost of law firm,” he said.

Carbiener added that LPS filed a motion to dismiss the Mississippi action.

 Automated masters

Rikard told Lawyers Weekly LPS is engaging in the unauthorized practice of law by dictating litigation through automation.

“Lawyers aren’t using their own judgment. LPS is substituting its judgment by way of its software,” he said.

The system was illustrated in a 2007 Pennsylvania bankruptcy case, In re Taylor. In that case the debtors asked their mortgage holder, HSBC, for a payment history.

An attorney who represented HSBC told the court “that HSBC was unresponsive to his notice that [it had been directed] to produce a loan history.” That was because, as U.S. Bankruptcy Judge Diane Weiss Sigmund wrote in a 2009 order, “he informed me he had no personal access to his client HSBC but rather communicated solely by means of an electronic information system known as NewTrak.”

NewTrak was developed by LPS “to provide foreclosure, bankruptcy and other mortgage loan-related default services to the mortgage industry.” It was the predecessor of LPS’s Desktop.

Together, MSP – another LPS program – and NewTrak manage, “without human interaction, the relationship between HSBC and its attorneys in the collection of delinquent mortgage loans through automated responses to certain queues.”

Gardner said that “LPS tells the attorneys what to do, how soon to do it and how to do it.”

Carbiener rejected that contention. He said Desktop merely “helps servicers and their attorneys track and manage the foreclosure process.”

But Rikard said the pressures LPS exerts on the system led to the “well-publicized” document problems. He said LPS’s oppressive timing mechanisms are designed to get properties foreclosed as fast as possible.

“Robosigners were created because of incredible volume of foreclosures and the pressures on various pieces of the process to get things done quickly,” he said.

Lenders don’t see LPS as the problem. According to Carbiener, it is the solution.

Carbiener said lenders and servicers are using Desktop and MSP “as key components to help identify past documents that need remediation and to create better processes going forward to ensure that proper reporting, audit and controls exist in document execution processes.”

Chase and Bank of America have completed their implementation of Desktop. Wells Fargo’s implementation is ongoing, Carbiener said, adding that most of the nation’s top 20 servicers will be using Desktop or some form of LPS software.

Bank of America and Wells Fargo did not respond to Lawyers Weekly’s requests for comment. Chase said it does not “talk about vendor relationships.” 

What the future holds

Carbiener acknowledged that LPS is the focus of several state and federal investigations relating to its foreclosure practices, but he did not think the ultimate outcome of those investigations would have a material impact on its business.

Gardner said the ultimate outcome of the civil actions “is that we are going to see a major sea change for servicers. They are going to have to change their business model.”

Gardner envisions a more traditional attorney-client model in which attorneys are able to communicate with their clients instead of taking directions from a computer program.

An investor asked Carbiener about that possibility during the conference call, but he rejected the fear that there would be a reverse in the trend toward outsourcing.

“Servicers are seeing the pressures of processing transactions and realizing the need to use better platforms like Desktop. The movement is toward a better system like ours,” he said.

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